Implicit climate subsidy exceeds profits at 20 top fossil fuel companies

A week ago, I published a research paper, along with my colleagues Paul Gilding and Jimena Alvarez. For 20 leading fossil fuel producing firms,  we measured the economic cost to society of the climate change impacts caused by the use of their products, and compared this with their profits in each year from 2008 to 2012. Because the companies presently don’t have to pay for these climate impacts, we view this as an implicit subsidy to the companies.

At the heart of the paper is a very simple comparison, which is shown in the figure below. For each company, the smallest circle is for 2008, with the years connected in order to the largest circle in 2012. Coal companies are shown in black or dark brown, and oil and gas companies in lighter shades of red, brown and orange. The dashed line in the figure represents economic cost to society equal to after‐tax profit.

Implicit subsidy figure 1 v2
All the companies lie above the line, which means that the economic cost to society of the CO2 emissions from the products they sell was greater than their after‐tax profit, with the single exception of Exxon Mobil in 2008. For pure coal companies (Coal India, Peabody, Shenhua Group, and China Coal) the economic cost to society exceeded total revenue in all years.

These results seem striking to us, hence the research paper. We are keen to have your comments and take part in a discussion about the meaning of the results, and this has started. The paper has been covered favourably by Dave Roberts at Vox who concluded that ‘with proper accounting, the fossil fuel business doesn’t look like such a moneymaker’. Tim Worstall at Forbes agreed with the numbers, and even the idea of a substantial carbon tax, but didn’t like our rather mild suggestion that ‘company profits could be lost and assets stranded by the resulting shift to low carbon energy’.

Goodness knows what Worstall will make of this paper by Naomi Oreskes and her colleagues which appeared in Climatic Change on the same day as our paper, and concludes that ‘major investor-owned fossil energy companies carry significant responsibility for climate change’.

What do you think?

Read the press release or the paper “Quantifying the implicit climate subsidy received by leading fossil fuel companies”

 

 

3 Responses to Implicit climate subsidy exceeds profits at 20 top fossil fuel companies

  1. As I made quite clear, it’s not the companies that carry the incidence of the climate damages. It’s the consumers. Exxon is not responsible for the emissions from my driving. I am responsible for the emissions from my driving.

    Thus: the companies are responsible for, should bear the economic burden of (ie, pay a carbon tax upon) their emissions of their own processes. Emissions during processing, this sort of thing.

    And we consumers should bear the costs of, pay that carbon tax, on the emissions from our own use. This is, of course, implicit in the very design of the Stern Review and so on.

    Thus a comparison of total emissions costs to corporate profits is simply, well, not perhaps wrong, but useless.

    We#re never going to try and charge total emissions costs to the corporates. Because what we want to change is consumer behaviour. Thus we must charge them to the consumer.

    • Tim,

      Thanks for your comment. Here’s my take on it. I think we agree that by far the best policy to tackle climate change is a strong, comprehensive, rising, fiscally-neutral tax on greenhouse gas emissions. To reduce transactions costs, I think that tax should be applied as soon as the relevant products enter the market. So it will be applied to the fossil fuel companies. They will decide how much of the tax to pass on to consumers. If they pass on all of it, their products will be much more expensive and they will lose sales, which will reduce their profits indirectly. If they pass on none of it, their profits will be reduced directly. If they pass on some of it, they will lose profits from both mechanisms. So there are risks to the companies, and it is not useless to see how the total impacts from burning their fuels compare to their existing profits. But it is only a first scoping exercise, and we say in the paper that ‘it is not a literal measure of the future financial liabilities of a company, as society is unlikely to apply the full costs to the companies concerned, at least not retrospectively.’ 

  2. Malcolm Fawcett
    Director, Climate Change at ConocoPhillips says

    Hi Chris,
    I recently read the above paper and found it interesting as Carbon Asset Risk is one of the issues that we are taking seriously and on which we are trying to increase our disclosure to stakeholders.
    I had a number of questions and I’d appreciate your thoughts. The first is around the social cost of carbon. I know you’ve done a lot of work on this and I’ve read many papers that have tried to estimate it, but in the end I wonder if this is something that is ever truly knowable or estimable with any accuracy . Without any history of climate damage we are trying to predict something which has a huge range of uncertainty and I think you try and take that into account with a huge number of computer runs, but how confident can you be of any number that is produced (aside of the whole discount rate discussion, which adds another layer of uncertainty)? Your paper makes three claims – that it proposes a technique that helps understand the level of materiality – that it gives an indication of the relative differences between companies and fuel types – and an indication of companies’ net contribution to society. I would argue that the technique certainly achieves the second claim (and for that alone it should be applauded), but possibly neither the 1st or 3rd. In Europe, taxes have been added to gasoline (sorry, I’m becoming American) that are well in excess of $122 per tonne CO2(e), but we haven’t seen the collapse of any European oil and gas companies. So there is something else that is going on in the economy which may have more to do with the other benefits that oil and gas bring (mobility, comfort, energy density, reliability, personal security, etc, etc) which consumers value more than the alternatives on offer – walking, mass transit, renewable fuels, electric cars, etc. This makes it difficult to judge the materiality that the imposition of a carbon price will have on a fossil fuel company without judging the utility of the alternatives. The other issue not addressed in your paper is that you assume that the future will look like history in terms of company portfolios (as well as future regulation, but you have mentioned that). In reality, companies react very quickly to changes in commodity prices, as has been seen by the recent oil price collapse. As of this minute most oil and gas companies have adjusted to a place where they are beginning to report profits again and have a path back to cash neutrality following a huge fall in their major product price. This is for a number of reasons, firstly companies have portfolios which contain many options allowing them to readjust to prices and demand fluctuations, secondly the industry does not work in a vacuum, so all other things are not equal – when oil prices fall so do all of the input prices – equipment, people, technologies, services, and thirdly the industry has all of the characteristics – finance, technology, people, scale, ingenuity, project management skills that will allow it to adapt and succeed at whatever the most economic method of producing energy happens to be. So I’m not sure that simply taking the social cost of carbon multiplied by a company’s historic consumer carbon emissions is a real reflection of materiality to the company or a company’s net contribution to society when so much of what society may value is missing from the calculation. I’d be interested in your thoughts.

    (posted here with Malcolm’s permission)

Leave a reply